Guernsey Practice Notes
Requirements for Approved
Occupational Pension Schemes
April 2015
These notes have been prepared by the BWCI Group in conjunction
with the States of Guernsey Income Tax Office
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Contents
1.
General Information
1
2.
Contributions
3
3.
Retirement Benefits
5
4.
Death Benefits
6
5.
Benefit Options
8
6.
Benefits on Withdrawal
10
7.
Pension Increases
12
8.
Additional Voluntary Contributions
13
Appendix 1
Application for and Consequences of Approval
14
Appendix 2
Definitions
16
Appendix 3
Proprietary Directors and Proprietary Employees
20
Appendix 4
Extra Statutory Concessions
21
Appendix 5
Form 681
22
Appendix 6
Commutation Examples
24
Readers are reminded that nothing stated in these notes should be treated as an authoritative statement
of the Law on any particular aspect or in any specific case and action should not be taken as a result of
these notes alone. Any further enquiries may be addressed to the Pension Schemes Supervisor, States
of Guernsey Income Tax Office, PO Box 37, 2 Cornet Street, St Peter Port, GY1 3AZ.
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1.
General Information
1.1
Introduction
These Practice Notes set out the contributions which may normally be paid to and the benefits
which may normally be provided by pension schemes and Death in Service Schemes seeking
approval under section 150 of the Income Tax (Guernsey) Law, 1975. The Director of Income
Tax may be prepared to allow other benefits in special circumstances. These notes do not cover
offshore pension schemes seeking exemption under section 40(o) of the Law.
1.1.1
Application of Tax Regime
Rather than adopting the benefit regime set out in these Practice Notes, schemes may instead
operate within the benefit limits of the tax regime in force on 31 December 2010. These are
summarised in the March 2003 edition of these Practice Notes. However, all schemes must
follow the limits and tax charges set out in paragraph 5.1.1 of this edition of the Practice Notes for
Fund Values which are Trivial in Amount.
Schemes must operate within the benefit limits of the regime they choose for all members of the
scheme. It is not permissible to adopt parts of the new regime and parts of the old regime (other
than for trivial commutation where the new regime must be adopted). Nor is it permissible to
apply different regimes to different members of the same scheme.
Any changes in scheme documentation to implement the new regime should be advised to the
Director as described in Appendix 1. It is not necessary to inform the Director if a scheme has
chosen to operate within the benefit limits in the March 2003 Practice Notes. However, the
Director retains the right to ask the trustees for this information.
1.1.2
Applications for Approval
The notes produced by the Director regarding the procedure for applications for approval,
together with a summary of the consequences of approval under section 150, are set out in
Appendix 1.
1.2
Definitions
The terms which appear in bold type in these notes are defined in Appendix 2.
1.3
Membership
Membership of an Approved Scheme must be restricted to employees of the employers
participating in the scheme.
Membership need not be made available to all of the employees in an employer’s service, but
membership of the scheme should be made available to all employees within a particular
category.
Membership need not be a condition of employment.
Every member of a scheme and every employee who has a right to be a member of the scheme
must be made aware of the terms of the scheme.
Proprietary Directors and Proprietary Employees may be admitted to membership but
additional conditions will apply. It is necessary to apply to the Director in order to confirm the
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1.
General Information
(continued)
additional conditions which have to be met by a particular scheme. Further details are set out in
Appendix 3.
As an alternative to a single Approved Scheme, it is possible to seek approval for up to 12
individual pension arrangements for any one employer.
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2.
Contributions
2.1
Contributions by Employers
The employer is required to contribute to the scheme. If the contribution is an Ordinary
Contribution it will be allowable as a deduction for tax purposes in the accounting period in which
it is paid. Anti-avoidance legislation prevents employers making disproportionately large
Ordinary Contributions for individual members.
Where a contribution is not an Ordinary Contribution, the Director may allow it as a deduction
for the accounting period in which it was paid. Alternatively, the Director may direct that the
contribution be apportioned over a longer period.
Where contributions are used for any purpose, other than for providing benefits, or surpluses are
refunded to the employer, they will be treated as income arising to the employer in that year of
charge and subject to income tax. The Director should therefore be notified of any such
payments or refunds.
Employers’ contributions are exempt from taxation as a benefit in kind for the employee.
2.2
Contributions by Members
A member is not required to contribute to a scheme. Where a member does contribute,
contributions in any year of up to the lower of £50,000 and 100% of Taxable Income will be
allowable as a deduction for tax purposes. For married couples, in relation to contributions to
Approved Occupational Pension Schemes, this limit applies separately to each spouse’s
contributions and individual taxable income.
The Law does not prohibit the payment of members’ contributions in excess of this amount but no
tax relief will be granted for contributions in any year in excess of the lower of £50,000 and 100%
of Taxable Income. This limit applies to the overall contributions to all Approved Occupational
Pension Schemes, Retirement Annuity Schemes and Retirement Annuity Trust Schemes.
The monetary limit of £50,000 is current as at 2015 but may be reviewed for subsequent years.
2.3
Carry Forward Provisions
From 2011 onwards, if an individual has made a contribution to an Approved Occupational
Pension Scheme but cannot take advantage of the full tax relief available to him in any year, he
may carry forward the unused tax relief to a later year, for a maximum period of 6 years following
the end of the relevant year of charge. Within that six year period, however, any contribution
made which exceeded the maximum relief available for that year alone, would absorb all, or part,
of any brought forward relief, irrespective of whether or not it was required to reduce any tax
payable.
The unused tax relief as a result of contributions to an Approved Occupational Pension
Scheme which are below the tax relief limit cannot be utilised by contributions to a Retirement
Annuity Trust Scheme or a Retirement Annuity Scheme unless the individual is also entitled to
carry forward provisions in those schemes as a result of contributions to those schemes which,
when aggregated with the Approved Occupational Pension Scheme contributions, are less
than the tax relief limit.
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2.
Contributions (continued)
The following example demonstrates the carry forward provisions.
An individual has a Taxable Income of £35,000 in 2011 and makes contributions to an Approved
Occupational Pension Scheme of £2,000 in 2011. He therefore has £33,000 of potential tax
relief available to carry forward to later years, to be utilised by Approved Occupational Pension
Scheme contributions by the end of 2017.
In 2012 he receives a (non-taxable) inheritance of £60,000 and invests it in his Approved
Occupational Pension Scheme. His Taxable Income is again £35,000.
The calculation of his unused tax relief to carry forward to 2013 and later years is:
Brought forward from 2011
Year of Charge 2012 allowance
£33,000
£35,000
£68,000
Contributions made in 2012
Available to carry forward
(£60,000)
£8,000
As the 2011 carry-forward has been fully utilised, £8,000 may be carried forward until the end of
2018. Note that the full amount of the pension contribution must be taken into account for
determining the amount carried forward even though the individual only required £35,000 of tax
relief to eliminate his tax liability for 2012.
In 2013 the individual’s Taxable Income is again £35,000 and he makes an Approved
Occupational Pension Scheme contribution of £2,000. The previous £8,000 unused carryforward remains available until 2018 and in addition, £33,000 of unused tax relief may be carried
forward until 2019.
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3.
Retirement Benefits
3.1
Retirement Date
A member may retire at any time from age 50 with an immediate pension, or at an earlier age if
due to Incapacity.
Where the Director has approved a scheme with a Normal Retirement Age below age 50,
benefits may be taken from this agreed Normal Retirement Age. However, earlier retirement will
not be permitted unless this is due to Incapacity.
A member may defer commencement of benefits beyond Normal Retirement Date. However,
commencement of benefits may not be deferred beyond age 75.
3.2
Pension
On retirement:

a Defined Benefit member may receive a pension calculated in accordance with the scheme
rules

a Defined Contribution member may receive a pension derived from the member’s Fund
Value.
Subject to these requirements, there are no limits on the amount of pension that can be provided.
If desired, the pension may be guaranteed for a period of up to 5 years.
3.3
Separate Lump Sum
A Defined Benefit scheme may provide a separate lump sum benefit up to the maximum set out
in paragraph 5.1.2 in place of the option set out in that paragraph.
3.4
Continuing in Employment
A member may receive retirement benefits from his employer’s scheme whilst continuing in
employment with his employer and accruing further benefits in the scheme. The examples in
Appendix 6 illustrate this flexibility.
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4.
Death Benefits
4.1
Death in Service Benefits (including Death in Deferment)
The following benefits may be provided:-


For a Defined Contribution member:

a lump sum (tax free) of up to four times Final Remuneration at the date of death*; and

a refund (tax free) of the member’s Fund Value; and

a pension payable to the member’s spouse, children or Dependants. This pension will
be taxable according to the recipient’s personal circumstances.
For a Defined Benefit member:

a lump sum (tax free) of up to four times Final Remuneration at the date of death*; and

a refund (tax free) of the member’s contributions to the pension scheme accumulated with
interest; and

a pension payable to the member’s spouse, children or Dependants calculated in
accordance with the scheme rules. This pension will be taxable according to the
recipient’s personal circumstances.
The four times Final Remuneration lump sum limit applies to the aggregate salary related lump
sum provided by an employer through both their Approved Occupational Pension Scheme and
any Death in Service Scheme.
* On death in deferment, Final Remuneration may be increased from the member’s date of
leaving the scheme to the date of death in line with inflation (as measured by reference to any
recognised cost of living index in Guernsey or the UK or in any other Crown Dependency).
4.2
Death after Retirement Benefits
The following benefits may be provided:-

a pension payable to the member’s spouse, children or Dependants with the aggregate of
such pensions not exceeding 100% of the pension which would have been provided for the
member had he not commuted any pension for a lump sum. This pension will be taxable
according to the recipient’s personal circumstances; plus

where less than five years’ pension has become payable to the member, a lump sum (tax
free) equal to the value of the pension for the balance of the five year period or continuation of
the pension for the balance of the five year period (taxable according to the recipient’s
personal circumstances).
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4.
Death Benefits (continued)
4.3
Partial Retirements
Subject to the requirement to aggregate benefits in an Approved Occupational Pension Scheme
and a Death in Service Scheme set out in section 4.1, the above limits apply to the benefits that
may be provided by each Approved Scheme.
Where an individual has commenced benefits but continues to work for their employer and accrue
further benefits in the same Approved Scheme, their fund from that scheme should be
segregated into a “retired part” and an “un-retired part”. On death the retired part should be used
to provide benefits no greater than those permitted by section 4.2 and the un-retired part should
be used to provide benefits no greater than those permitted by section 4.1.
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5.
Benefit Options
The following options may be offered to members:-
5.1
Commutation of Pension
5.1.1
Full Commutation
Where the Fund Value is Trivial in Amount or the Fund Value in respect of a spouse’s pension
is Trivial in Amount or retirement is due to Serious Ill Health the entire Fund Value may be
paid as a lump sum.
It is permissible to commute a Fund Value which is Trivial in Amount at any age. The full
amount of the trivial commutation is taxable at the standard rate (currently 20%) if commutation
occurs before age 50 and at half the standard rate if commutation occurs on or after age 50.
However, the trivial commutation of a spouse’s pension on the death of a member is taxable at
the standard rate regardless of age.
It is not necessary to seek prior approval from the Director before commuting a Fund Value
which less than £15,000. However, before commuting a Fund Value of greater than £15,000,
Trustees should:
a) obtain a declaration from the individual confirming that the Fund Value may be deemed
Trivial in Amount (ie the individual is age 50 or over and the aggregate of the individual’s
Fund Values (including any previous trivial commutations, taken at face value) from all
Approved Occupational Pension Schemes, Retirement Annuity Schemes and
Retirement Annuity Trust Schemes does not exceed £30,000); and
b) seek clearance from the Director
Tax should be remitted to the Director within 30 days of the commutation being paid.
5.1.2
Retirement Lump Sum
In circumstances other than those set out in paragraph 5.1.1 above, a member who has attained
age 50 may commute up to 30% of his Fund Value for a lump sum
Retirement lump sums in excess of a specific limit are subject to income tax. In assessing the
taxable element of a lump sum, the retirement lump sum benefits (excluding Serious Ill Health
lump sums, death in service lump sums, trivial commutation lump sums and lump sums paid in
respect of overseas transfers in) paid since 1 January 1998 from all Approved Occupational
Pension Schemes, Retirement Annuity Schemes (personal pensions) and Retirement
Annuity Trust Schemes, must be aggregated. The maximum tax-free lump sum limit is
reviewed annually. Details of the limits for the last five years are provided below.
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5.
Benefit Options (continued)
Year
Maximum tax-free lump
sum
£
2011
167,000
2012
173,000
2013
179,000
2014
183,000
2015
184,000
Details of the current limit in force may be found at www.gov.gg/taxationonpensions
A retirement lump sum can be paid at the same time or before or after a member commences
pension payments and a member may elect to receive his lump sum in any number of tranches,
payable on, before or after the date the member’s pension payments commence. However,
retirement lump sums cannot be paid before age 50 unless the Director has approved a scheme
with a Normal Retirement Age below age 50.
Where an individual is a member of both a Defined Benefit scheme and a Defined Contribution
scheme sponsored by the same employer it is permissible, on the advice of an Actuary, to
aggregate the benefits for the purpose of determining the maximum lump sum. This aggregate
lump sum, or as much of it as is available, may be taken from the Defined Contribution scheme,
if the scheme documentation permits this.
The examples in Appendix 6 illustrate this flexibility.
5.2
Variable Pensions
A member retiring before States Pension Age may choose to have his pension adjusted so that
it is greater before States Pension Age and reduced thereafter.
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6.
Benefits on Withdrawal
6.1
Withdrawal from the Scheme
The benefit options which must be made available are dependent upon the period of a member’s
Qualifying Service.
6.1.1
More than 5 years of qualifying service
If a member leaves a scheme with more than 5 years of Qualifying Service he has the right to
choose one of the following options:-
6.1.2

Deferred Benefits

a refund of his own contributions (if any)

a Transfer Payment into another Approved Occupational Pension Scheme

a Transfer Payment into a Retirement Annuity Scheme or a Retirement Annuity Trust
Scheme.
More than 2 years but less than 5 years of qualifying service
If a member leaves a scheme with more than 2 years but less than 5 years of Qualifying Service
he has the right to choose one of the following options:-

a refund of his own contributions (if any)

a Transfer Payment into another Approved Occupational Pension Scheme

a Transfer Payment into a Retirement Annuity Scheme or a Retirement Annuity Trust
Scheme
A scheme may provide Deferred Benefits but there is no requirement to do so.
6.1.3
2 or less years of qualifying service
Any member leaving a scheme with 2 or less years of Qualifying Service must be entitled to a
refund of his own contributions (if any). If the scheme permits Transfer Payments to other
Approved Occupational Pension Schemes for members with 2 or less years of Qualifying
Service it must allow transfers on similar terms to Retirement Annuity Schemes and
Retirement Annuity Trust Schemes.
A scheme may provide Deferred Benefits but there is no requirement to do so.
6.2
Taxation of Refunds and Transfer Payments
Refunds of members’ contributions are subject to a tax charge at half the basic rate (currently a
tax charge of 10%) on the amount refunded to the member. For a Defined Benefit scheme, the
refund may include reasonable interest on the member’s contributions. For a Defined
Contribution scheme, the refund may allow for the actual investment return earned on the
member’s contributions.
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6.
Benefits on Withdrawal (continued)
Transfer Payments may also be made to:

pension schemes approved in the United Kingdom, Jersey, the Isle of Man and the Republic
of Ireland and Statutory Schemes

other pension schemes outside Guernsey which provide similar benefits (ie schemes which
have the same early retirement and retirement lump sum restrictions as an Approved
Occupational Pension Scheme)

Guernsey schemes which are neither Approved Occupational Pension Schemes nor
Retirement Annuity Schemes nor Retirement Annuity Trust Schemes.
Appendix 1 covers the tax implications of such transfers.
6.3
Time Limit
The legislation does not provide for any time limit within which a member should exercise their
options on leaving the scheme. However the Director is prepared to allow a scheme to impose a
“reasonable time limit” in its rules.
The Director has indicated that a time limit for a transfer application of 12 months from the date
of leaving the scheme would be acceptable provided that the trustees of a scheme have some
discretion to extend the time limit if necessary.
6.4
Transfer of pension benefits
A member may transfer his Deferred Benefits into his present scheme (the “receiving scheme”).
The receiving scheme may provide either Defined Benefit or Defined Contribution benefits in
respect of the Transfer Payment.
It is also permissible for a pension in payment to be transferred. However, where a member
transfers a pension from which he has already received a lump sum, the receiving scheme may
not pay a further lump sum.
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7.
Pension Increases
Deferred pensions and pensions in payment may be increased by the greater of:-

5% per annum and

the increase in inflation over the appropriate period as measured by reference to any
recognised cost of living index in Guernsey or the UK or in any other Crown Dependency.
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8.
Additional Voluntary Contributions
8.1
Additional Voluntary Contributions (AVCs)
A member may pay additional voluntary contributions (AVCs) in order to provide additional
benefits. The requirements relating to the payment of members’ contributions are set out in
paragraph 2.2.
8.2
Deferment of AVC Benefits
The Director will allow benefits arising from AVCs to be deferred beyond the date that main
scheme benefits are taken, provided that the benefits are not deferred beyond age 75. Subject to
scheme rules, it is permissible for benefits arising from AVCs to be paid before the main scheme
benefits.
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Appendix 1 Applications for and Consequences of Approval
Applications for Approval
Applications for approval should be made using form 681 and addressed to the Pension Schemes
Supervisor (see Appendix 5). Scheme documentation does not need to be submitted with the application
form but the Director may subsequently request additional information. Where a new employer adheres
to a multi-employer scheme, the Trustees should inform the Director in writing.
Once an application for approval has been received it will be allocated a reference number which will be
prefixed by the letter “R”. This reference number should then be quoted on all further correspondence in
connection with the scheme.
Any changes to the scheme documentation which affect or may affect continued approval must be
advised to the Director within 30 days of implementation. The deed of amendment does not need to be
submitted but a letter summarising the changes should be sent to the Director.
Any changes to the trustees or the correspondence address for the scheme must be notified to the
Director within 30 days.
Schemes Approved outside of Guernsey
Where a scheme has been established and approved by some other jurisdiction, for example in the
United Kingdom or Jersey, it may still be possible to approve that scheme under section 150 of the
Income Tax (Guernsey) Law, 1975 insofar as it relates to Guernsey members. It will, however, be
necessary for it to comply with the conditions of section 150 and this may be done in two ways:

by deed of amendment, introducing supplementary rules in respect of Guernsey members;

by the trustees signing an undertaking, agreeing to comply with the conditions of section 150 and, in
particular, to those relating to early leavers. See section 6.
It will be a condition of approval that the trustees agree to operate the Employees Tax Instalment Scheme
and to remit the tax so deducted to the States of Guernsey when a pension in respect of Guernsey
service comes into payment, unless covered by the provisions of a Double Taxation Agreement.
Tax consequences of schemes approved under section 150
Income derived from investments and deposits forming a part of the scheme will be exempt from
Guernsey income tax.
Both employers’ and employees’ contributions will qualify for income tax relief. See paragraphs 2.1 and
2.2.
A refund of contributions to an employee will be subject to income tax at one half of the standard rate.
A refund of contributions or any other payment from the pension fund to an employer will be subject to
income tax at the standard rate.
Lump sum payments which fall within the limits laid down by the States of Guernsey Income Tax Office,
excluding trivial commutations but including a lump sum of up to 4 times Final Remuneration and a
refund of contributions plus interest following the death of a member, may be made free of tax.
Retirement lump sums in excess of the tax-free limit taken in commutation of pension (see paragraph
5.1.2) are taxable at the standard rate.
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Appendix 1
Applications for and Consequences of Approval
Commutations of Fund Values which are Trivial in Amount are taxed at the standard rate if the member
is under age 50 and at half the standard rate if the member is over age 50. However, the trivial
commutation of a spouse’s pension on the death of a member is taxable at the standard rate regardless of
age.
Transfer Payments to other Approved Occupational Pension Schemes or to Retirement Annuity
Schemes or Retirement Annuity Trust Schemes may be made without deduction of tax.
Transfer Payments made to:

schemes outside of Guernsey, with the exception of certain schemes approved in the United
Kingdom, Jersey, the Isle of Man and the Republic of Ireland and Statutory Schemes; or

Guernsey schemes which are neither Approved Occupational Pension Schemes nor Retirement
Annuity Schemes nor Retirement Annuity Trust Schemes
will be treated as a refund of contributions and subject to income tax at one half of the standard rate.
All pensions paid from an Approved Scheme are subject to Guernsey income tax unless payable gross
under the terms of a Double Taxation Agreement with the pensioner's country of residence. The payer will
normally be required to operate the Employees Tax Instalment Scheme
Pension scheme accounts
Pension scheme accounts do not need to be submitted to the Director but the Director retains the right
to request a copy of the accounts. Unless trustees have been informed otherwise by the Director, there
is no Income Tax requirement for the accounts to be audited except where the provisions of Appendix 3
apply.
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Appendix 2
Definitions
This appendix sets out the definitions of the terms which appear in bold type in these notes.
Actuary
A Fellow of the Institute and Faculty of Actuaries
Approved Occupational
Pension Scheme
A pension scheme or part of a pension scheme approved by the Director in
accordance with section 150 of the Law and any scheme authorised by
Resolution of the States of Guernsey
Approved Scheme
A pension scheme or part of a pension scheme approved by the Director
under section 150 of the Law.
Crown Dependency
Guernsey, Jersey or the Isle of Man
Death in Service
Scheme
A scheme providing benefits in accordance with paragraph 4.1 of these
Practice Notes.
Dependant
An individual who is dependent for the ordinary necessities of life upon a
member of an Approved Scheme.
Deferred Benefits
Benefits payable at a later date which are of the same type as the benefits
payable under the scheme in respect of a member who retires at his Normal
Retirement Age, and which are no less in value than whichever is greater
of:-

the benefits which would be payable under the scheme to the person
concerned if he retired at his Normal Retirement Age having been a
member of the scheme for the length of time, and in all the
circumstances, that he has in fact been a member of the scheme; or

the benefits which could be provided by investment of his contributions (if
any) between the date when he ceases to be a member of the scheme
and the date when he reaches his Normal Retirement Age.
Defined Benefit
A scheme where the scheme rules define the benefit independently of the
contributions payable, and benefits are not directly related to the investments
of the scheme.
Defined Contribution
A scheme which determines the individual member’s benefits by reference to
contributions paid into the scheme in respect of that member, usually
increased by an amount based on the investment return on those
contributions.
Director
The Director of Income Tax referred to in section 205 of the Law.
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Appendix 2
Final Remuneration
Definitions
The greatest of:(i)
the highest annual remuneration for any year during the last five years of
service with the employer, and
(ii) the highest basic remuneration for any year during the last five years of
such service plus the average of any fluctuating emoluments for any two
or more years during the said five years, and
(iii) the average of total remuneration for any three or more consecutive
years during the last ten years of such service
Whenever final remuneration is that of a year other than the 12 months
ending with the relevant date, or is an average of the three or more years’
remuneration, each year’s remuneration may be increased in line with the
increase in the Guernsey Index of Retail Prices from the end of the year to
the relevant date.
Full-time working
director/employee of a
trading company
A director or employee who devotes more than 30 hours each week to his
directorship or employment with a company carrying on business of which the
income is chargeable under Class 1 of Section 2 of the Law.
Fund Value
For a Defined Contribution scheme, the member’s accumulated fund,
including contributions and investment returns.
For a Defined Benefit scheme, the value placed on the member’s benefits
(before any commutation option is exercised), as calculated by an Actuary.
Incapacity
Physical or mental deterioration which prevents an individual from following
his or her normal employment, or which seriously impairs earning capacity.
Law
The Income Tax (Guernsey) Law, 1975, as amended.
Normal Retirement Age
The age at which the rules of the scheme concerned entitle that person to
immediate benefits on his retirement, irrespective of his state of health.
Normal retirement age may differ between categories of member and may be
any age within the range 50 to 75. In certain circumstances the Director may
allow a lower normal retirement age.
Normal Retirement Date
The date on which a member attains Normal Retirement Age.
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Appendix 2
Ordinary Contribution
Definitions
A periodic contribution fixed in amount or calculated on some definite basis
by reference to the earnings or contributions of the members of the scheme,
or to the number of such members, or in the case of a body corporate, a
periodic contribution consisting of a share of the profits arising to that body
from the business in connection with which the scheme is established and
computed according to a formula approved by the Director.
Ordinary contributions should normally be on a consistent basis of calculation
for all members of the scheme. However different contribution structures can
be applied with the agreement of the trustees on the advice of the Actuary
where appropriate.
Proprietary Director
A director of a company who is either the beneficial owner of, or able, either
directly or through the medium of other companies or by any other indirect
means, to control more than fifteen per cent of the ordinary share capital of
the company.
Proprietary Employee
In relation to a company, an employee who is the beneficial owner of, or able,
either directly or through the medium of other companies or by any other
indirect means, to control more than fifteen per cent of the ordinary share
capital of the company.
Qualifying Service
In relation to a member of an occupational pension scheme, means the
aggregate of any period during which the person concerned has in fact been
a member of:-

that scheme; or

any other scheme in respect of which a Transfer Payment has been
received by that scheme in relation to the person concerned.
Relevant Earnings
As defined at section 157A(9)(a) of the Law
Retirement Annuity
Scheme
means a scheme approved under section 157A(2) of the Law
Retirement Annuity
Trust Scheme
means a scheme approved under section 157A(4) of the Law
Serious Ill Health
A member will be deemed to be in serious ill-health if the scheme’s trustees
have received evidence from a registered medical practitioner that the life
expectancy of the member is less than a year.
States Pension Age
Age 65 as amended from time to time by States Ordinance
Statutory Scheme
A scheme as defined in section 612(1) of the UK Income and Corporation
Taxes Act 1988
Taxable Income
Income of the member in respect of which tax is chargeable and arising or
accruing in the year of computation. No account is taken of deductions or
allowances.
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Appendix 2
Transfer Payment
Definitions
For a Defined Contribution scheme, a payment equal to the member’s
Fund Value, at the time when the payment is made.
Reasonable
administration expenses may be deduction from the Fund Value.
For a Defined Benefit scheme, a payment equal to the value at the time
when the transfer payment is made, as determined by an Actuary or a
person holding other actuarial qualifications approved by the Director, of:
(i)
the Deferred Benefits which the person concerned is entitled to choose
under the scheme concerned, or
(ii) in cases where the person concerned is not entitled, under the scheme
concerned, to choose Deferred Benefits, the deferred benefits which he
could have chosen had he been so entitled
For a pension in payment, a payment equal to the value at the time when the
transfer payment is made, as determined by an Actuary or a person holding
other actuarial qualifications approved by the Director, of the benefits
payable.
Trivial in Amount
A Fund Value not exceeding £15,000.
A Fund Value of greater than £15,000 will be deemed trivial in amount for an
individual aged 50 or over if the aggregate of the individual’s Fund Values
(including previous trivial commutations) from all Approved Occupational
Pension Schemes, Retirement Annuity Schemes and Retirement
Annuity Trust Schemes does not exceed £30,000.
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Appendix 3 Proprietary Directors and Proprietary Employees
This appendix sets out the conditions which will normally be imposed on an Approved Scheme if
Proprietary Directors or Proprietary Employees are to be admitted to membership. However, an
application must be made to the Director, before they can be admitted, in order to confirm the additional
conditions which have to be met for a particular scheme.
Trustees

The scheme must have an independent trustee who is acceptable to the Director. The independent
trustee cannot be removed from office without the permission of the Director.

Trustees cannot undertake transactions in relation to the scheme with related parties except on an
“arm’s length” basis.

The assets of the scheme must not be used for the personal benefit or enjoyment of the trustees or
scheme members.
Membership

Only a full time working director/employee of a trading company may be included. A director or
employee who devoted at least 30 hours per week to the company would be considered full time.
Funding and Accounts

Annual accounts must be prepared by a qualified accountant and filed within six months of the end of
the scheme year.

Employee contributions may be paid in accordance with paragraphs 2.2 and 2.3 of these Practice Notes.

Employer contributions may be paid in accordance with paragraph 2.1 of these Practice Notes.
Employer contributions in excess of 25% of Relevant Earnings will be taxable as a benefit in kind of the
employee unless prior approval has been granted by the Director.
Insured schemes
The Director may allow some of the above requirements to be relaxed if the scheme is to be established
using an insurance company.
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Appendix 4
Extra Statutory Concessions
This appendix summarises the extra statutory concessions relating to pensions which the Director may be
prepared to allow in certain circumstances.
Divorce
When a husband and wife separate the Director may be prepared to allow a transfer of part of the pension
rights of one of the parties from an Approved Scheme to another Approved Occupational Pension
Scheme, Retirement Annuity Scheme or Retirement Annuity Trust Scheme. Each case would however
need to be submitted to the Director for individual consideration and subject to agreement with the scheme
trustees.
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Appendix 5
Form 681
Application for Approval under the
Income Tax (Guernsey) Law, 1975, as amended (“the Law”)
Occupational Pension Scheme
Retirement Annuity Contract
Retirement Annuity Trust Scheme
(delete as appropriate)
1.
Name of Scheme/Contract
..........................................................................................................
..........................................................................................................
2.
Names of Trustees and
Administrators
..........................................................................................................
..........................................................................................................
3.
4.
5.
Name of sponsoring employer
(if applicable)
..........................................................................................................
Details of any associated schemes
for employer named at 3. above
..........................................................................................................
Address for correspondence
..........................................................................................................
..........................................................................................................
..........................................................................................................
6.
7.
8.
Date of establishment of
Scheme/Contract
..........................................................................................................
Anticipated approximate
size of membership
..........................................................................................................
I/we hereby apply for approval under: (delete as appropriate)
(a)
(b)
(c)
9.
section 150(2) of the Law (Occupational Schemes);
section 157A(2) of the Law (Retirement Annuity Contracts);
section 157A(4) of the Law (Retirement Annuity Trust Schemes).
I/we confirm that:
(a)
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a copy of the Instrument establishing the Scheme/Contract is available to the Director of
Income Tax on request (see Note 2 on next page);
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Appendix 5
(b)
(c)
(d)
10.
Form 681
any changes to the Scheme, Deed, Rules or Contract of a material nature will be advised to
the Director within 30 days of implementation (see Note 4 below);
any changes to the Trustees or the correspondence address will be notified to the Director
within 30 days;
the Trustees/Administrators:
(i)
are satisfied that the Scheme, Deed, Rules or Contract satisfies all of the conditions of
the legislation under which approval is sought;
(ii)
are aware of and have read the Practice/Guidance Notes/Codes of Practice published
by the Director in respect of such arrangements (see Note 5 below);
(iii) undertake to ensure that the Scheme, Deed, Rules or Contract is administered so as to
adhere to the relevant legislation, notes, guidance or codes, or to advise the Director
immediately if this ceases to be the case;
(iv) undertake to supply the Director with such further information as the Director may
reasonably require.
Declaration
I hereby declare that the information provided in this application is true and correct to the
best of my knowledge and belief. I have taken professional advice in completing the
application, as appropriate.
I am authorised to make the declaration above on behalf of the Trustees/Scheme
Administrator.
Signed
.............................................................................
Date
.............................................................................
Capacity in which you are making the application (if not Trustee/Scheme Administrator):
........................................................................................................................................................................
NOTES ON APPLICATION FOR APPROVAL
1.
When completed, the application should be submitted to the Income Tax Office, addressed to:

2.
3.
4.
5.
6.
the Pension Schemes Supervisor (for section 150 applications); or

the Retirement Annuity Supervisor (for section 157A applications).
Do NOT send Scheme or Contract documentation unless requested. For Retirement Annuity Trust
Schemes, the document establishing the Scheme should only be submitted if its trustees are not
regulated by the GFSC.
A letter confirming approval will be sent as soon as possible after receipt of the application, which
will contain the approval reference number.
A change to a Scheme, Deed, Rules or Contract will be regarded as material if it affects, or may
affect, continued approval. There is no specific form for advising such changes.
All legislation, notes and codes are available at www.gov.gg/taxationonpensions.
The application should only be signed by a person authorised and able to provide the information
and undertakings requested. This will obviously include the Trustees or Administrators, but may
also include a person holding a legal, actuarial or accountancy qualification.
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Appendix 6
Commutation Examples
The examples in this appendix illustrate how the lump sum calculation and payment in tranches could work in
practice. Alternative methods are also valid provided the benefits paid do not exceed the limits defined in
these Practice Notes.
Defined Contribution Scheme
A member aged 50 has a Fund Value of £100,000 on 1 January 2011. He would like to receive a lump
sum of £10,000 on 1 January 2011 but does not wish to commence pension payments on this date.
On 1 January the administrator calculates the minimum fund that needs to be “retired” to provide the lump
sum. This is derived as
£10,000 = £33,333
30%
After payment of the lump sum the member’s fund has two segments:

A “Retired Segment” of £23,333 [£33,333 - £10,000] which must be used to provide an annuity either
immediately or at a future date

An “Unretired Segment” of £66,667 [£100,000 - £33,333] which can be “retired” (with up to 30%
commuted) at a future date
Suppose the member:

Pays additional contributions over 2011 which total £15,000

Receives an investment return of 5% over 2011 on the funds invested at 1 January 2011

Receives an investment return of 3% on the contributions paid over 2011.
The position at 1 January 2012 is that the member will have:

£24,500 remaining in his Retired Segment [£23,333 x (1+5%)]

£85,450 in his Unretired Segment [£66,667 x (1+5%) + £15,000 x (1+3%)]
Defined Benefit Scheme
An active member aged 50 has an accrued pension of £11,000 pa payable from age 65. If he wishes to
receive a lump sum he would need to “retire” part of his accrued pension and this pension would lose its
link to the member’s salary.
Scheme Factors:

Early retirement reduction at age 50 = 40%

Commutation Factor at age 50 = 19:1

Actuarial Factor for Fund Value = 22:1
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Appendix 6
Commutation Examples
If the member opts to retire £5,000 then:

Pension payable from age 50 = £3,000 pa [£5,000 x (100% - 40%)]

Maximum lump sum = £19,800 [£3,000 x 22 x 30%]. This could be taken as one lump sum or in a
number of tranches (up to a cumulative maximum of £19,800) on, before or after the date that his postcommutation pension payments commence.
The member would be entitled to a post-commutation pension of £1,958 pa [£3,000 - £19,800/19]
payable immediately. However, if the member does not wish to receive an immediate pension then this
would be actuarially increased until the member chooses to commence payment.
The residual £6,000 pa “unretired” pension would continue to be linked to the member’s salary and in
addition the member could accrue further service which is also linked to his salary.
Defined Contribution and Defined Benefit Scheme
Where an individual is a member of both a Defined Benefit scheme and a Defined Contribution scheme
sponsored by the same employer it is permissible, on the advice of an Actuary, to aggregate the benefits
for the purpose of determining the maximum lump sum. This aggregate lump sum, or as much of it as is
available, may be taken from the Defined Contribution scheme, if the scheme documentation permits
this.
Suppose a member has:

Defined Contribution Fund Value = £100,000

Defined Benefit accrued pension = £11,000 pa

Defined Benefit Actuarial Factor for Fund Value = 22:1
For the purposes of determining the aggregate maximum lump sum, the limits in this edition of the
Practice Notes must be applied, regardless of whether the scheme has adopted this regime.
Aggregate Maximum Lump Sum
= 30% x [Defined Contribution Fund Value + Defined Benefit Fund Value]
= 30% x [£100,000 + 22 x £11,000]
= £102,600
The entire Defined Contribution Fund Value could be commuted, leaving a £2,600 lump sum to be
taken from the Defined Benefit scheme. Note that the maximum lump sum which could be taken from
the Defined Benefit scheme will be restricted by the edition of the Practice Notes that the scheme has
chosen to adopt.
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